Vacancy Rate Hits New Record, Price Plunge Continues

Vacancy Rate Hits New Record, Price Plunge Continues

April 30, 2008

By Dean Baker

"The rate of price decline will destroy almost $6 trillion in housing wealth this year."

In the first quarter, the vacancy rate on ownership units hit a record 2.9 percent. Before the recent crash, the vacancy rate on ownership units had never exceeded 1.9 percent. The rental vacancy rate also rose, although at 10.1 percent it is still slightly below the record of 10.4 percent set in the first quarter of 2004. Not surprisingly, the West showed the biggest increase in vacant ownership units, with the rate rising from 2.6 percent last year to 3.2 percent this year. With record vacancy rates, the downward pressure on prices should continue for the foreseeable future.

The seasonally adjusted ownership rate stood at 67.9 percent. While this is up slightly from the 67.7 percent fourth quarter rate, it is 0.2 percentage points below the third quarter rate, which suggests the fourth quarter number may have been an aberration. The first quarter number is 1.4 percentage points below the peak rate of 69.3 percent in the second quarter of 2004. For blacks the picture looks considerably worse. The homeownership rate fell to 47.1 percent, 1.7 percentage points below the peak of 48.8 percent reached in the first quarter of 2005. This is the lowest rate of homeownership for blacks since 1999, which is, of course, well before the surge in subprime lending.

The Case-Shiller data released yesterday indicate the rate of house price decline is accelerating. The 20-city index declined 12.7 percent over the last year, while the 10-city index fell 13.6 percent. However, the annual rate of price decline over the last quarter was 24.9 percent in the 20-city index and 25.8 percent in the 10-city index. At this rate of price decline, the excesses of the housing bubble will have largely disappeared by the end of the year. At the same time, the price decline implies an incredibly rapid loss of wealth. In real terms, the rate of price decline in the 20-city index would imply a loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner.

Year over year prices are down by 17.2 percent in San Francisco, 19.4 percent in Los Angeles, and 22.8 percent Las Vegas. Over the last quarter, prices in these cities have declined at annual rates of 26.5 percent, 26.3 percent, and 40.8 percent, respectively. Prices are even falling sharply in less inflated markets. Prices in Boston are down 4.6 percent year over year, in New York by 6.6 percent, and in Washington by 13.0 percent. Over the last quarter, the annual rates of price decline have been 15.9 percent, 11.4 percent, and 26.8 percent, respectively.

The new homes sales data released last Friday are also consistent with the picture shown in the Case-Shiller index. Sales were down by 8.5 percent from the February rate and by 36.6 percent over the last year. The Northeast showed the sharpest decline with March sales down 19.4 percent from February and 64.6 from year ago levels. The weak sales levels in the Northeast were likely in part due to better than usual weather in the prior two months, which may have pulled some March sales forward. An inventory equal to 11 months of sales (which does not include canceled sales of homes that were never occupied) will provide substantial downward pressure on prices going forward.

The data on mortgage applications also provides no evidence of any upturn in sight. The purchase index for last week dropped to 340.1, a decline of 4.8 percent from the previous week. Just a few weeks ago, this index was over 400. As noted before, the decline in the index understates the decline in mortgages issued, since many applications are now being denied.

The interest rate of 30-year fixed rate mortgages is hovering above 6.0 percent. The Fed likely does not have the ability to lower this further. Additional cuts in the federal funds rate will probably send the 30-year rate higher, further depressing housing demand.

All signs point to a continued sharp decline in the market, which should get us to the bottom sooner.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net). CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.